Stocks of domestic aviation companies have rallied sharply since the beginning of the calendar year 2017 as macroeconomic factors are supporting to improve the topline and the bottomline of airline companies. Companies such as SpiceJet, Jet Airways and InterGlobe Aviation which together command 71% of the domestic market share have seen an increase in the value of their stocks by 106%, 49% and 36% respectively.

Favourable movement of the price of crude oil followed by appreciation of the INR against the USD is expected to reduce costs for airline companies in the last quarter of FY 2017. Brent crude oil prices have declined 14.25% to 48 USD per barrel and the USD has depreciated 6% against the INR in the last quarter of the FY 2016-17. Fuel, maintenance and lease costs are dollar denominated and any decline in dollar price relative to the rate of the rupee reduces costs for airline companies. Lower crude oil prices benefit aviation firms as jet fuel prices, which typically constitute a majority of airlines’ operating costs, are directly linked to international crude oil prices. Indian aviation companies with around 65% of their costs linked to the USD would be the biggest beneficiaries of the INR appreciation. Movement of INR (appreciation against the USD) has high significance for the aviation industry in India. A sustained strength of the INR would increase the earnings per share for airline companies. The favourable impact of the price movement of crude oil and the rupee along with strong growth in air traffic would be visible in the fourth quarter performance of companies and if the momentum continues then the performance would continue to reflect from first quarter of the FY 2017-18 and onwards.

Domestic air traffic has shown a consistent growth of 20% – 25% throughout 2015 and 2016, peaking in January 2017 at 25.13%. India enjoys the fourth position in terms of overall air passenger traffic (both domestic and international) along with the UK and has inched closer to becoming the third largest one. Japan, which flew 141 million passengers in CY 2016, is ahead of India, whose total air passenger traffic was 131 million in the previous year. United States, with 815 million passengers in CY 2016, enjoys the top position, followed by China, with 490 million.

In a move to connect the regional areas with un-served and under-served airports, the Ministry of Civil Aviation unveiled 128 routes under the regional connectivity scheme (RCS) on 30 March 2017 to a total of five operators under Udan (Ude Desh Ka Aam Nagrik).

What could further fuel demand for airlines is a plan by railways to extend the dynamic pricing system (which is 40% higher than the base fare) to all routes in the 128 routes under the regional connectivity scheme railway network. Such a widespread use of the dynamic pricing system could be a tailwind for airlines as they may gain from a shift of railway passengers to air.

Load factor is a measure of how much of an airline’s passenger carrying capacity is used or the average percentage of seats filled in an aircraft. Domestic airlines carried 95.116 million passengers in the 11 months of FY 2017, higher by 22% from 77.676 million passengers ferried in the corresponding period a year ago.

Oil marketing companies (OMC) have reduced aviation turbine fuel (ATF) price for the first time in the last four months in April 2017. A kilolitre of ATF will cost Rs 2811.38, or 5.2%, less at Rs 51482 in Delhi from 1 April 2017, according to Indian Oil Corp, the nation’s largest fuel retailer. ATF cost will be Rs 2910.78, or 4.9%, less at Rs 56268 per kilolitre (kl) in Kolkata and Rs 2959.86, or 5.2%, less to Rs 54324 per kl in Chennai. ATF price will be Rs 2767.58, or 5.16%, lower to Rs 50896 per kl in Mumbai.

Conclusion

The Indian aviation industry is likely to report 22% – 23% passenger traffic growth in FY 2017, supported by ongoing low airfare regime. The airlines are maintaining healthy PLFs backed by low airfares. However, since the ATF prices have been on an uptrend during the year, the impact on profitability of the airlines in Q4 of FY2017 is inevitable as average ATF prices in the quarter are 38% higher over a year- ago period, while the yields continue to remain under pressure. The fuel cost per available seat kilometer (Cask) of the domestic aviation industry increased to Rs. 1.16 in January 2017 from a low of Rs. 0.82 in February 2016, and the same is expected to increase further in February and March 2017. The Centre for Aviation (CAPA) in its latest report on India outlook expected domestic air traffic to grow 25% and cross 130 million in FY 2018.

The public-private partnership model has certainly served to modernize and upgrade the Indian aviation infrastructure scenario. The benefits are also being seen in airports owned by the public sector, thus serving to improve the overall experience of flying public of India. Going forward, the continued use of public-private partnership model in airports and related aviation infrastructure will help in further growth and bring the benefits of air connectivity to all the corners of the country.

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